Question

Describe what factors contribute to the pension benefit obligation. Discuss the effect of the increase or decrease on the PBO. How is this change reported in the financial statements and what other accounts are affected? Provide an example from a publicly-traded company. Please respond to at least one additional post.

Answer 1

A projected benefit obligation (PBO) is an actuarial measurement of what a company will need at the present time to cover future pension liabilities. This measurement is used to determine how much must be paid into a defined benefit pension plan to satisfy all pension entitlements that have been earned by employees up to that date, adjusted for expected future salary increases.

KEY TAKEAWAYS

• A projected benefit obligation (PBO) is an actuarial measurement of what a company will need at the present time to cover future pension liabilities.
• Projected benefit obligation (PBO) assumes that the plan will not terminate in the foreseeable future and is adjusted to reflect expected compensation in the years ahead.
• Actuaries are responsible for using the projected benefit obligation (PBO) in order to calculate whether or not pension plans are underfunded.

How a Projected Benefit Obligation (PBO) Works

Companies can provide employees with a number of benefits, including a salary, when they retire from work. The Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 87 states that companies must measure and disclose their pension obligations, together with the performance of their plans, at the end of each accounting period

A projected benefit obligation (PBO) is one of three ways to calculate expenses or liabilities of traditional defined benefit pensions—plans that take into account employee years of service and salary to calculate retirement benefits.

CORPORATE FINANCE & ACCOUNTING  FINANCIAL ANALYSIS

Projected Benefit Obligation (PBO)

By DANIEL LIBERTO

Updated Sep 5, 2020

What Is a Projected Benefit Obligation (PBO)?

A projected benefit obligation (PBO) is an actuarial measurement of what a company will need at the present time to cover future pension liabilities. This measurement is used to determine how much must be paid into a defined benefit pension plan to satisfy all pension entitlements that have been earned by employees up to that date, adjusted for expected future salary increases.

KEY TAKEAWAYS

• A projected benefit obligation (PBO) is an actuarial measurement of what a company will need at the present time to cover future pension liabilities.
• Projected benefit obligation (PBO) assumes that the plan will not terminate in the foreseeable future and is adjusted to reflect expected compensation in the years ahead.
• Actuaries are responsible for using the projected benefit obligation (PBO) in order to calculate whether or not pension plans are underfunded.

How a Projected Benefit Obligation (PBO) Works

Companies can provide employees with a number of benefits, including a salary, when they retire from work. The Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards No. 87 states that companies must measure and disclose their pension obligations, together with the performance of their plans, at the end of each accounting period.  

A projected benefit obligation (PBO) is one of three ways to calculate expenses or liabilities of traditional defined benefit pensions—plans that take into account employee years of service and salary to calculate retirement benefits.

PBO assumes that the pension plan will not terminate in the foreseeable future and is adjusted to reflect expected compensation in the years ahead. As a result, it takes into account a number of factors, including the following:

• The estimated remaining service life of employees
• Assumed salary rises
• A forecast of employee mortality rates

Actuaries are responsible for establishing whether pension plans are underfunded. These qualified professionals, who specialize in the measurement and management of risk and uncertainty, determine the benefits needed through a present value calculation.